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What are the core components of a financial plan?

- May 20, 2019

By Paul Hoerrner Jr., CFP®

Managing Director


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“Which road do I take?” she asked.

“Where do you want to go?” responded the Cheshire Cat.

“I don’t know,” Alice answered. “Then,” said the Cat, “it doesn’t matter.”

It may be a memorable scene from the make-believe world of Alice in Wonderland by Lewis Carroll, but it also resonates with financial planners. Financial decisions involve trade-offs: forks in the road. If you don’t have a well-strategized plan, you’re acting as if it doesn’t matter to you. Which road should you take? Financial planning can help answer that question and many others that appear throughout your life. Financial plans are different for everyone, but there are six core components that a well-designed plan should generally cover.


First, you must find out if your money is on the right path, and that means taking a close look at cash flows. Are you following a budget or spending freely? Is there any leakage or inefficiency on your balance sheet? What can be done to optimize your cash flow? Perhaps you can refinance your mortgage and put those
dollars to better use. Next, consider identifying how much can be saved and how to allocate discretionary capital in order build wealth and fund things like your children’s college tuition, your next vacation and ultimately retirement.


Second, you should consider risk management. Most people overlook their greatest asset—their ability to earn income. So what happens to your family if you die prematurely? What happens if you can no longer work due to a disability? How will your portfolio be impacted by a long-term care event? A sound financial plan outlines the types of insurance available to offset these risks that can proactively provide survivor benefits, income protection and funds to offset future qualified medical expenses.


Third, you should consider your appetite for risk. It’s easy to say you’re willing to take a lot of risk until the market drops. A risk questionaire is used in the planning process. It helps identify your tolerance for risk. A financial plan should analyze how your current investments stack up in terms of risk. It should illuminate how a proper asset allocation can provide a glide path to build your wealth. It also should help identify the proper asset location, which can create more portfolio efficiency by having the right mix of qualified and nonqualified investment accounts. By having such a plan, you create a contract with yourself and your advisor, which serves as a benchmark to follow. It can help to minimize rash decisions during the many market panics that are bound to occur over the long run.


Fourth, don’t forget your financial partner: Uncle Sam. Are you strategically using traditional IRAs, Roth IRAs, 401(k)s and other qualified plans that allow for tax-free or tax-deferred withdrawals at retirement? A good plan shows the compounding benefits of tax deferral, and alternatively, how the power of tax-free distributions can play out in the future. More advanced plans can model certain capital gains strategies, including taxloss harvesting, which helps to offset investment gains and preserve more of your principal. The goal should be to eliminate unnecessary tax drag while preserving investable assets and net income to amplify your long-term wealth.


Fifth, you should account for the day you retire. A good financial plan simulates your lifestyle burn, which is the amount of money you want or expect to spend on an after-tax basis to support your lifestyle. This creates a benchmark for the plan and dovetails with other planning sections. How much do you need to save, and what rate of return do you need to meet your “spend” in retirement? The lifestyle “burn” serves a baseline to identify if you’re on track for retirement and, if not, how far off you are. Such a plan can articulate how much your required minimum distributions, Social Security, investments and other assets will produce in after-tax dollars to meet your expected demands.


Sixth, don’t forget about estate planning. Nobody likes to think about it, but large fortunes are often lost from having no clear financial plans. Do you know how much federal and state estate tax you are facing now and in the future? A solid financial plan outlines how much estate tax you would be subject to with and without planning, factoring in lifetime exemptions, where assets are located and how assets are titled. It should show your future estate taxes based on the projected growth of your estate. The goal is to solve for the liquidity needed so that you can transfer the maximum amount of wealth to your heirs, charities or a private foundation.

Along the way, there will be many life events that will impact your financial plan. A large inheritance, the birth of a child, marriage, divorce, a home purchase, job loss, loss of a spouse, and/or retirement are all examples of key life events—any of them can materially change the road you are on and create new forks. Each road may have different answers for different people. Working with a Certified Financial Planner™ professional can be critical in helping to ensure a smooth ride on the particular road you are on.

Don’t be like Alice. Start financial planning early and witness the insight and value it can bring to your life. l


Guest Contributors
Michael S. Schwartz, Ron Deutsch, Drew J. Collins, Sharon Hayut, Michael Tanney, Paul F. Hoerrner., Jr. CFP, J. Scott Kephart
at Magnus Financial Group LLC. | | 800.339.1367


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Asset class performance was measured using the following benchmarks: U.S. Large Cap Stocks: S&P 500 TR Index; U.S. Small & Micro Cap: Russell 2000 TR Index; Intl Dev Large Cap Stocks: MSCI EAFE GR Index; Emerging & Frontier Market Stocks: MSCI Emerging Markets GR Index; U.S. Intermediate-Term Muni Bonds: Bloomberg Barclays 1-10 (1-12 Yr) Muni Bond TR Index; U.S. Intermediate-Term Bonds: Bloomberg Barclays U.S. Aggregate Bond TR Index; U.S. High Yield Bonds: Bloomberg Barclays U.S. Corporate High Yield TR Index; U.S. Bank Loans: S&P/LSTA U.S. Leveraged Loan Index; Intl Developed Bonds: Bloomberg Barclays Global Aggregate ex-U.S. Index; Emerging & Frontier Market Bonds: JPMorgan EMBI Global Diversified TR Index; U.S. REITs: MSCI U.S. REIT GR Index, Ex U.S. Real Estate Securities: S&P Global Ex-U.S. Property TR Index; Commodity Futures: Bloomberg Commodity TR Index; Midstream Energy: Alerian MLP TR Index; Gold: LBMA Gold Price, U.S. 60/40: 60% S&P 500 TR Index; 40% Bloomberg Barclays U.S. Aggregate Bond TR Index; Global 60/40: 60% MSCI ACWI GR Index; 40% Bloomberg Barclays Global Aggregate Bond TR Index.